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Tallying the Full Cost of the Financial Crisis

by  Karen WeiseBusinessweek/Bloomberg News
September 14th, 2012

Tallying the Full Cost of the Financial Crisis

Photograph by Corbis

Financial Reform

To mark the fourth anniversary of the Lehman Brothers bankruptcy, which greeting card would be appropriate? Perhaps a sympathy card? A farewell? If Better Markets, a Washington (D.C.) nonprofit that supports tighter financial regulation, were to design a card, it would probably have a gilded “$12.8 trillion” plastered across the front. That’s the amount Better Markets estimatesthe 2008 financial crisis cost Americans.

At first blush, the cost of such a colossal crisis seems incalculable. Myriad factors are involved, including such things as the toll of unemployment and lost wages, losses in the stock market and corporate earnings, declining home values, the depletion of retirement savings, and decreased consumer spending.

So Better Markets took a different approach: Instead of trying to calculate the numerous individual costs in different parts of the economy, it looked at the highest level of all economic activity—U.S. gross domestic product. First, Better Markets took estimates from the Congressional Budget Office and the Federal Reserve Bank of St. Louis to calculate actual losses. That’s the difference between the potential GDP the U.S. would have generated without the financial crisis and the actual GDP already created or currently projected to be created. Those “actual” losses total $7.6 trillion from 2008 to 2018.

Then Better Markets tried to take into account the fact that actual GDP would have been even lower if the Treasury Department and the Federal Reserve hadn’t taken extraordinary measures, such as enormous bailouts of such companies as American International Group (AIG), Citigroup (C), and Bank of America (BAC).

To calculate these “avoided” losses, Better Markets updated a 2010 estimate (pdf) by Alan Blinder, an economist at Princeton University, and Mark Zandi, chief economist at Moody’s Analytics (MCO), and determined that fiscal and monetary policies prevented $5.2 trillion in losses from 2008 to 2012, when the Blinder/Zandi exercise ends. So if one adds $7.6 trillion of “actual” losses and $5.2 trillion in “avoided” losses, there’s an estimated grand total of $12.8 trillion in costs for the crisis.

With its tally, Better Markets is hoping to ensure that Americans—especially the politicians and bureaucrats in Washington—will remain attuned to how searing the Lehman collapse and all that followed truly was. As Wall Street complains about the costs of new regulations, Better Markets’ study is a reminder of the losses that come with a crisis. “Only a full accounting of the costs will provide the basis and motivation to take the proper actions to reduce the likelihood that the American people will have to suffer from another financial collapse and economic crisis,” the report says.

In the upcoming issue of the New York Times Magazine,NPR’s Adam Davidson writes about his visit to the current Lehman Brothers offices and said it “appears an awful lot like a normal investment bank … [e]xcept that Lehman’s sole objective is to sell everything it owns so it can repay its lenders and disappear.” He wrote that financial crises end when people forget they ever happened and confidence returns, and that there are signs this is already happening.

Still, at nearly $13 trillion, the 2008 financial bust will be tough for many ever to forget.

Weise is a reporter for Bloomberg Businessweek.

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